Wall Street and weather hit U.S. farms

Plunging prices are actually a price correction, after a year of climbing prices due to global demand and an extremely tough summer of floods and droughts nationwide.
Dairy farmers are especially hard-hit, because the price they're getting for raw milk has dropped drastically while the price of feed grain has not gone down as much.

Penn State University | Oct 21, 2011

Recent weeks have been bad for agricultural commodity producers, with falling prices impacting Pennsylvania's farmers. An economist in Penn State's College of Agricultural Sciences said there are reasons why prices for corn, milk, soybeans, beef, pork and wheat have fallen sharply.

"For the last several weeks, prices for basic commodities have been going down sharply," Dunn said. "Some went down a few weeks ago, others went down recently, but all basic agricultural commodities that are of interest in Pennsylvania have dropped in the last two months -- pretty substantially in most cases.

"Some by 20 percent, others by just 10 percent, but all are down considerably. Corn and soybeans have bounced back somewhat this week but still are well below their levels in early September."

Dairy farmers are especially hard-hit, because the price they're getting for raw milk has dropped drastically while the price of feed grain has not gone down as much, according to Dunn. The disparity is compounded by excessive spring rain, summer drought and flooding in the Northeast and record drought in the Southwest. The harsh weather wiped out much of the feed corn and forage crops intended to feed dairy herds.

"It's been a bad year for on-farm feed production, so a lot of farmers will be going out to buy stuff they thought they already had produced," he said. "So, they spent money to plant crops they didn't get, and now they have to spend more money to replace them."

Dunn said because the weather in the Midwest has improved in recent weeks, the corn crop should be better than projected earlier in the summer -- a much-needed break, since Eastern farmers probably will have to buy supplemental feed and forage at premium prices.

Another culprit is Wall Street, Dunn explained, as speculators jumped in to take advantage of a well-known economic indicator, driving prices higher than the norm.

"A lot of times, if you have a national economic recovery coming, the basic commodities lead the recovery," he said. "So, people with no interest in or understanding of agriculture invested in commodities because they were looking to make money.

"But once it became clear that the U.S. economy was not recovering, and that we actually may be at risk for a double-dip recession, these people fled from the basic commodities because they were afraid prices would go back down. And of course, their departure back into cash and out of agriculture meant that the commodities lost value because there weren't buyers willing to step in at those high prices.

"To some extent, they created an investment 'bubble' of higher-than-reasonable commodity prices."

Falling prices?

Even though prices are falling, Dunn said any Pennsylvania farmers with crops to sell will get good prices for them because the prices are still high, just not as high as they were. He said the state's animal producers are most threatened, because the unusual weather of this summer, coupled with flood damage, will force them to import some very high-priced feed grain, leading to higher poultry, beef and pork prices for consumers.

"Our corn crop in Pennsylvania is small, and much of what would be going for grain instead will be chopped into silage, and so we're going to be importing a lot more corn from the Midwest than we ordinarily do," he said. "And the price differential [between in-state and imported corn], which is normally about 30 cents at this time of year, is now about $1.30. So the price of feed for Pennsylvania will be very expensive, even with the overall drop in prices."

Consumer prices will be affected less than the basic commodities because there's a lot of value added to the raw materials, Dunn said. "But consumer food prices are increasing and in some cases will go up further. I wouldn't be surprised if poultry prices rise, for instance. They've been down -- the poultry industry has been hit very hard by high corn prices -- but ultimately they'll cut their flock sizes in response to that, and poultry prices will go up."

Dunn pointed out that consumer price increases affect the poor more because they spend a greater percentage of their money on food. "We haven't had very much food-price inflation for quite a while, but it looks like we're going into a period of 4 to 5 percent food-price inflation, perhaps even more," he said. "Interest rates are essentially zero, and incomes are not growing, so it's going to be more noticeable than it would be if you were earning good money on your savings and were getting regular raises."

Sometimes price jumps are absorbed by food processors and supermarkets instead of being passed on to consumers. But, Dunn said, don't count on that too much this time.

"For one thing, margins in most of these industries are not very good right now," he said. "A couple of supermarkets have done 90-day price freezes for some of these commodities, but in general, price increases will be passed along."

Consumers essentially will have to do what farmers do: deal with it.

"Price instability is a fact of life in farming," he said. "They'll have to hold off on purchases, make old equipment last a little longer, cut back on personal consumption. In some cases, farmers will change what they produce."